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Stewart RobertsonSenior Economist (UK and Europe)
While interest rates appear to be on a gradual upward trajectory in much of the world, UK financial markets were forced to scale back expectations of tighter monetary policy as softer domestic economic data appeared to give the Bank of England pause for thought.
Key points
- Shares up in April as Korea tensions ease
- US bond yields hit four-year high
- Weak data cast doubt on early UK rate rise
- UK economic growth forecasts slashed
Global equities enjoyed a better month in April thanks to an easing of tensions on the Korean peninsular, and as a string of strong corporate results coupled with further merger and acquisition activity offset worries over the impact of an ongoing rise in government bond yields.
The MSCI World index returned 2.0 per cent in local currencies, which equated to a 3.08 percent return in sterling terms as the pound fell for a second month against the majority of other currencies. The rally came as North and South Korea held an historic summit where they agreed to discuss denuclearising the Korean Peninsula and bringing a formal conclusion to the Korean War.
Among the leading markets, the UK was a standout performer, aided by sterling’s decline, which should boost the value of big multinationals’ export earnings once they have been translated back into their domestic currency.
Bond markets fell once again, with the yield on ten-year US government bonds – a closely watched benchmark – briefly piercing above three per cent for the first time in more than four years. Bond investors remain concerned the US government is embarking on a huge fiscal stimulus at precisely the wrong moment.
While interest rates appear to be on a gradual upward trajectory in much of the world, UK financial markets were forced to scale back expectations of tighter monetary policy as softer domestic economic data appeared to give the Bank of England pause for thought.
Mark Carney, the bank’s governor, said markets were wrong to assume a UK rate hike in May was a foregone conclusion. He indicated that while rates were still likely to rise gradually, the bank was in no hurry to move.
His comments, which followed a string of weak economic releases – inflation declined to its lowest level in a year, wage growth decelerated and retail sales dropped sharply, in March – jolted both sterling and interest rate futures, which had reckoned a May rate hike was a near certainty.
In recent days, one of the UK’s leading economic think tanks slashed its forecasts for 2018 after data showed economic growth almost ground to a standstill in the first quarter.
The National Institute for Economic and Social Research now expects the economy to expand by just 1.4 per cent in 2018, having just three months earlier expected 1.9 percent growth. Its gloomy prediction came after official numbers showed output rose just 0.1 percent in the first quarter, the slowest pace of quarterly expansion since the end of 2012.
Financial markets still expect interest rates to rise further this year, but the next hike is now not expected to arrive until August at the earliest, which will be welcome news for borrowers and people with mortgages.
